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Quality Junior Miner Trains are Leaving the Station

Commentaries & Views

With gold being up over 13% while the GDX was up just a paltry 7% in 2017, I strongly believe a major mean-reversion catch-up rally is in the process of unfolding in the miners. Historically, the GDX would have leveraged the 13% gain in gold last year by 2x to 3x for solid annual gains of at least 25% to 35%. But since investors were more focused on what seemed to be forever rising equity markets and cryptocurrencies, they wanted nothing to do with the miners of gold.

The combination of the miners underperforming the gold price and a soaring US equity market in 2017 gave miner investors little reason to hold gold stock positions into year-end. However, this set-up became the perfect storm for contrarian money waiting to pounce on tax-loss selling deals in quality juniors as we headed into the expected Fed rate hike on Dec 13.

Since the announcement of the rate increase, the miners had been leading gold higher until the second trading day of this year. The solid move in gold stocks began after the $21 level in the GDX was tested and held in mid-December for the fourth time in 2017, but has stalled out at the $24 area on the first day of trading of this year when it became short-term overbought on Jan 2.

Despite the sell-off in the major miner ETF, the quality silver juniors and low-cost producers have continued to climb while the GDX has been correcting. When silver and its miners lead gold after a prolonged consolidation in the precious metals sector, it has historically been a very good indication of a major bottom being reached. Most of the quality junior silver miners were up over 10% on Fed day last December and have added more to their respective gains since then.

Furthermore, while the big money traders and fund managers are returning from the holidays, quality juniors are beginning to bifurcate from the sector after the GDXJ hit strong resistance at the $38 level. In fact, many of the juniors which I hold and/or follow are already up over 30% since mid-December of last year and a few are poised to possibly break-out to their respective 52-week highs ahead of the sector.

After a brutal decline and the last tax-loss selling, investor has left quality juniors, which maintain a low share structure. The move off a major low can be breath taking. This is why the resource speculator should always have an ample cash position heading into Q4, which can often be the best time to buy a junior resource stock.

Gold rose an unprecedented 15 of next 16 sessions after the Fed raised rates in mid-December and has been trading sideways in 2018 between $1307 and $1325 while working off an overbought situation on the daily chart. It would bode well for bullion to continue towards very strong long-term resistance above $1350 in January if it can continue to build a base above $1300 next week.

After back-testing the neckline of the 3-month head and shoulders top on the daily Cash Settle Index at the beginning of this week, the US dollar reversed on Wednesday after reports that China would slow or halt its purchases of U.S. Treasuries. The buck slipped further when the euro popped higher on Thursday following hawkish minutes from the European Central Bank’s December meeting. An upside breakout in the euro, which is near a 3-year high, could weaken the dollar towards long-term support at 91. A close below this critical level of support this month would open up the possibility of a monthly close above $1375 in gold. This would give the market technical confirmation of gold being in a bull market and bring massive amounts of capitol into the tiny mining sector.

Another short-term catalyst for gold would be the beginning of a long overdue 10%+ correction in the US stock market. The severely over-bought S&P 500 index has now gone nearly two years without a 10%+ correction and is trading at an extreme above its 200-day moving average, not to mention an average trailing-twelve-month price-to-earnings ratio of 31x, which is far above the 28x bubble threshold. The bullish sentiment in US equities is now over 60% bulls, which is a critical psychological barrier that has not been seen since 2011. Investors will remember gold when their stock-heavy portfolios begin to sell-off in earnest and rush to diversify into the miners.

The painful gold stock consolidation is now entering its 18th month and has built a solid accumulative base in the GDX, which can support another huge up-leg in the miners. It is my contention that the major selling has now dried up in gold stocks, so weakness should be bought in the quality miners before the GDX reaches strong resistance at the $25-$26 level. The bullish percentage index (BPGDM) is still below 30% bulls and although the most recent Commitment of Traders (CoT) report has become less bullish, it is still well below levels of previous tops.

If the scenarios I have mentioned in the US dollar and/or the equities begin to unfold, the next leg of the precious metal miner bull will be technically underway once the $26 level in the major miner ETF has been broken.

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